Patent trolls (or sharks) are small patent holding individuals or firms who trap R&D intense manufacturers in patent infringement situations in order to receive damage awards for the illegitimate use of their technology. While of great concern to management, their existence and impact for both corporate decision makers and policy makers remains to be fully analyzed from an academic standpoint. In this paper we show why patent sharks can operate profitably, why they are of growing concern, how manufacturers can forearm themselves against them, and which issues policy makers need to address. To do so, we map international indemnification rules with strategic rationales of small patent-holding firms within a game-theoretical model. Our central finding is that the courts’ unrealistic consideration of the trade-offs faced by inadvertent infringers is a central condition for sharks to operate profitably.
Keywords: Patent, patent shark, patent troll, damage award, infringement
JEL Classifications: M00, M11, M21, K00, K11, K33